Consumer Spending: Better Luck Next Christmas

Consumer Spending: Better Luck Next Christmas

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Here’s a good news-bad news story for retailers this holiday season. U.S. households are paying down household debt at a record pace. But we’re still at least a year away from consumers resuming their free-spending ways.

Economist Asha Bangalore of Chicago’s Northern Trust Bank reported this week that homeowners knocked nearly a half trillion dollars or nearly five percent off their outstanding mortgage debt in the past two years. Credit card holders paid down $157 billion or better than six percent of their outstanding bills.

But total indebtedness for households remains extremely high by historical standards. Total debt nearly equaled a full year’s gross domestic product on the eve of the Great Recession, and is still above 90 percent – twice as high as it was in the early 1980s when America began its quarter-century-long, credit-fueled splurge at the mall.

Henry Blodget, the former stock touter turned financial journalist, suggested this morning at the Business Insider that the “deleveraging” process still has a long way to go. “What consumers spend on debt repayment, they can't spend on stuff,” he wrote. “So if this deleveraging continues – which it must, if consumers are ever to return to a normal level of indebtedness – the repayment process will keep a lid on consumer spending for the foreseeable future.”

Is debt-reduction-fueled austerity the new normal? Moody’s Analytics’ Mark Zandi thinks the pessimistic view is focused on the wrong variable. Rather than total debt, what matters more is how much personal income is devoted to paying debts. And there, households are already fairly well down the road toward fiscal solvency.

Debt service as a percent of household income fell from 14 percent on the eve of the Great Recession to 12 percent in the second quarter of this year, about where it was during the last recession. “At the current rate of deleveraging and interest rates, debt service will be back to early 1990s lows by this time next year,” Zandi wrote in a recent report.

In fact, Moody’s is projecting economic growth to reach 4 percent in 2012 due to rejuvenated consumer spending, not the 3 percent predicted by most economists. “The household as consumer will be in a position a year from now where there will be far less debt overhang and more ability to spend as opposed to just paying principle and interest,” Edward Friedman, an economist at Moody’s, said in a telephone interview last week. “That’s definitely a piece of our forecast and one of the reasons we see 2012 as stronger than the consensus.”

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.